What is a Variable Cost?

Variable costs are expenses that may change from one instance to the next, based on several different factors. Unlike a fixed cost, a variable cost can be much more difficult to budget, and may at times exceed the limits of the budget when related to an unexpected expense.

One of the easiest ways to understand a variable cost is by applying the principle to the household utilities. Each monthly billing cycle will reflect a different amount due. The variance in the monthly charge is directly related to the amount of service utilized by the household during the billing period. For example, the power bill may be relatively low one month, owing to the fact that the home required little in the way of heating or cooling. However, the next period included several days that were extremely cold. The household required more electricity to maintain a comfortable temperature inside the home. As a result of the increased consumption, the charge reflected on the next power bill will be higher.

The same set of circumstances takes place in business as well. When any factor requires a greater outlay of resources in order to maintain production, the result is a variation from the usual cost of operation. A variable cost may occur when a manufacturer experienced downtime with one machine in the production process, and must run the machine a couple of extra days to produce the usual number of goods. This could lead to additional costs such as overtime and more utility consumption for the extra days that the plant runs to make up for the down time. The result is that a variable cost for that production period is incurred.

A variable cost in business is often associated with unexpected increases in the cost of labor, the additional consumption of standard and usual resources, and unexpected factors such as an equipment breakdown. Many corporations attempt to partially compensate for covering these types of costs by building in extra resources into the budget. Understanding that even the most efficient of operations will incur some degree of variable cost make sit possible to absorb the additional expense without derailing the financial stability of the company.